Bankruptcy debt finance personal: Wiping clean the slate on debt; the ins and outs of declaring personal bankruptcy
Wiping clean the slate on debt
For many Americans, these words from Deuteronomy have assumed a new poignancy. Despite the general robustness of the economy, people in rising numbers are finding they can't wait for the seventh year. Instead, they're filing for personal bankruptcy--now.
Last year, 338,213 debtors sought protection under Chapters 7 and 13 of the federal bankruptcy law--the primary vehicles for personal relief. That was up 20 percent from 1984. The number is sure to climb this year, largely because the fall in oil prices has led to a surge of layoffs in energy-producing states. At the U.S. court in Houston, 2,741 personal-bankruptcy cases were filed in the first three months of 1986, compared with 1,499 in the same period of 1985.
If you're contemplating a declaration of bankruptcy, be aware of its implications. On the positive side, the declaration keeps creditors at bay. No one can foreclose on your home or repossess your car while you're in bankruptcy proceedings. "This gives people a lot of relief from the mental pressure they're under," says Oklahoma City lawyer Thomas Bolt.
But declaring bankruptcy has its costs. For one thing, it makes re-establishing credit extremely difficult, since the filing can remain on your credit record for up to 10 years. "By and large, we do not grant loans to people who have taken bankruptcy," says Ann Stephenson, spokesman for Beneficial Corporation, a leading consumer lender. Moreover, many people are traumatized by bankruptcy, viewing it as a blow to their self-image, though lawyers and creditors agree that bankruptcy carries far less of a stigma today than in the past.
Before filing for protection, you must determine which chapter to use. The more drastic course is Chapter 7, which in effect clears the slate of all obligations except "nondischargeable" debts such as alimony, child support, taxes and government-insured student loans. The law permits one Chapter 7 filing every six years. Chapter 13 allows the filer to consolidate nearly all debts, including taxes, and propose a trustee-supervised plan for repayment over three years. Some courts permit a repayment schedule of up to five years. There is no limit on the number of Chapter 13 filings.
Carl Johnson, an El Paso lawyer, recommends Chapter 7 "if there is no income coming into a family or the income and debt are so disparate that, after paying normal expenses, there is nothing left over to fund a repayment plan." Someone with an income that is stable but insufficient to pay off all creditors is a good candidate for Chapter 13, he suggests.
Although Chapter 13 filers try to repay some debts, they may have no better shot at re-establishing credit than people who file under Chapter 7. "We view Chapter 7 and Chapter 13 the same way," says Lawrence Abt III, a lawyer with Manufacturers Hanover Financial Services. "If someone burns you, you're going to be extra careful the second time around."
Getting credit after declaring bankruptcy is difficult but possible. While you must list all debts when you file, chances are that creditors you have paid regularly won't learn of your bankruptcy and thus won't revoke your privileges. Keep up the payments and you'll build up an acceptable credit history.
In general, start small. Set up an account with a local merchant. Find a lender who will allow a cosigner to guarantee your debt. Use a cash deposit as collateral for a loan. If the bankruptcy stemmed from extenuating factors, such as an injury, send a brief explanatory letter to your local credit bureau.
Perhaps the best advice is to avoid declaring bankruptcy if possible. Many cities have counseling services that teach debtors how to budget and help them negotiate informal arrangements with creditors. As Terry Blaney, president of the Consumer Credit Counseling Service of Houston, puts it, "Bankruptcy should be a last resort."
